Direct line: 1300 987 995
* Govt to create wind-down unit for ailing state bank
* Will seek contributions from subordinated creditors
* Balkans banking network may be sold this year
(Adds market reaction, quotes)
By Michael Shields and Angelika Gruber
VIENNA, March 14 (Reuters) - Austria has finally decided to create a "bad bank" for 18 billion euros of assets at ailing Hypo Alpe Adria
The decision ends months of wrangling over how to handle the bank that Austria had to nationalise in 2009 to avoid a collapse with regional implications, but comes at a cost for Hypo's home province of Carinthia and perhaps some Hypo investors.
"There were many reasons to seriously consider insolvency, but in the end the risks were incalculable," Spindelegger told a news conference.
The government again demanded Carinthia contribute and now intends to bail in holders of nearly 2 billion euros ($2.8 billion) worth of subordinated debt and non-voting participation capital, making them contribute to wind-down costs, Spindelegger and central bank Governor Ewald Nowotny said.
The 18 billion euros includes bad loans, leasing deals and real estate but also more than 4 billion in liquid assets.
Nowotny, who had lobbied hard against letting Hypo go bust or forcing losses on Hypo bondholders, was asked about the treatment of investors who own 1 billion euros worth of subordinated Hypo debt with federal guarantees.
"Federal guarantees will of course be honoured," he told a news conference, but added: "This is a matter where appropriate negotiations and regulation will be done to achieve this effect."
Carinthia guarantees another 900 million euros worth of such instruments, a finance ministry spokesman said, adding that details about how to bail in these creditors were under discussion and may require specific legislation.
The bank's senior bonds gained four points in the secondary market, while Austrian sovereign debt showed little reaction.
"The Austrian government has, as expected, backed away from a threat to impose losses on senior bondholders in Hypo Alpe-Adria. Bonds are up sharply, and the news should also be positive for other Austrian banks that have been affected by the speculation," analysts at Creditsights said.
Carinthia Governor Peter Kaiser said the province - which would have been dragged under as well had Hypo gone bust - was open for talks and would contribute to the costs but he did not say to what extent.
Creating a "bad bank" will relieve the bank's chronic need for fresh capital but also push Austrian state debt to around 80 percent of economic output and drive up its budget deficit by around 1.2 percentage points this year.
That will leave a rump business comprising its Balkans banking network that Nowotny said could be sold this year, ahead of a mid-2015 deadline set by the European Commission.
Talks on reaching an overall settlement with former Hypo owner BayernLB
Austria this week authorised a quick capital injection even though the exact amount Hypo needs immediately is not yet known.
Hypo Alpe Adria has already got 4.8 billion euros in state aid since 2008 and needs more to be able to meet minimum capital requirements when it finalises its 2013 results.
($1 = 0.7180 euros)
(Aditional reporting by Aimee Donnellan in London, editing by David Evans)
((Michael.Shields@thomsonreuters.com)(+43 1 531 12 258)(Reuters Messaging: michael.shields.thomsonreuters.com@reuters.net))
Keywords: AUSTRIA HYPO/